Bill Backus – Chief Financial Officer Ted Harris – President and Chief Executive Officer.

Francesco Pellegrino – Sidoti & Company Brett Hundley – The Vertical Group Tim Ramey – Pivotal Research Tony Polak – Aegis Capital.

Greetings, and welcome to the Balchem Corporation Second Quarter 2017 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Bill Backus, CFO, for Balchem Corporation. Thank you, Mr. Backus. You may begin..

Ladies and gentlemen, thank you for joining our conference call this morning to discuss the results of Balchem Corporation for the quarter ending June 30, 2017. My name is Bill Backus, Chief Financial Officer. And hosting this call with me is Ted Harris, our President and CEO.

Following the advice of our counsel, auditors and the SEC, at this time, I would like to read our forward-looking statement. This release does contain or likely will contain forward looking statements, which reflect Balchem’s expectation or belief concerning future events that involve risks and uncertainties.

We can give no assurance that the expectations reflected in forward-looking statements will prove correct, and various factors could cause results to differ materially from our expectations, including risks and factors identified in Balchem’s Form 10-K. Forward-looking statements are qualified in their entirety by this cautionary statement.

I will now turn the call over to Ted Harris, our President and CEO..

Thanks, Bill. Good morning, ladies and gentlemen, and welcome to our conference call. This morning, we reported record second quarter consolidated net sales of $147.1 million, which resulted in record second quarter net income of $16.5 million or $0.51 per share on a GAAP basis.

This result includes significant non-cash amortization expenses of $6.6 million for acquisition-related intangible assets, which were recorded in these second quarter GAAP financial statements. The amortization expense is a direct result of acquisition, valuation and business combination accounting rules.

This quarter also includes a $240,000 favorable tax benefit due to the adoption of updated share-based payment accounting.

In addition, the current quarter includes $1.9 million of transaction and integration costs, primarily related to the acquisition of Innovative Food Processors, Inc., or IFP for short, which I will provide more details on shortly. Lastly, there was an indemnification settlement of $2.1 million relating to the purchase of SensoryEffects.

Consequently, our first quarter non-GAAP net earnings of $20.5 million or $0.64 per share reported in our press release earlier this morning exclude these items to facilitate comparative. evaluation of this current period operating performance versus the prior year period.

These non-GAAP net earnings of $20.5 million or $0.64 per share were 2.7% or $600,000 below the comparable prior year quarter of $21.1 million or $0.66 cents per share. We delivered second quarter free cash flow of $50 million and also paid down $13.3 million of debt, including $4.5 million of accelerated payments.

In July, we also made an additional accelerated debt payment of $16 million, which further reduced the outstanding balance on our revolving line of credit to $15.5 million from the $85 million we borrowed to fund the acquisition of IFP and partially fund the acquisition of Albion.

Our second quarter sales of $147.1 million were 6% higher than the $138.8 million result of the prior year comparable quarter and were a record for the second quarter.

Sales growth in three of four our reporting segments, Human Nutrition & Health, Specialty Products and Industrial Products, contributed to the increase, which HNH and Specialty Products achieving all-time record quarters.

The primary sales drivers were increases in powder systems as a result of both legacy growth and the acquisition of IFP, Cereal Systems growth, strong domestic and international plant nutrition sales and stronger sales into the shale fracking market.

These increases were partially offset by a decline in ruminant sales within the Animal Nutrition & Health segment and repackaged gas sales within Specialty Products. Our consolidated gross margin percentage was 31.8% of sales in the quarter, down 167 basis points from a 33.5% of sales level in Q2 of 2016.

Adjusted gross margin percentage, adjusted this year primarily for the previously mentioned amortization expense as a direct result of acquisition valuation and business combination accounting rules of $659,000, was 32.2% of sales, down 360 basis points from a 35.8% of sales level in the prior year comparative period.

The decline was primarily due to higher raw material costs within the quarter across all of our segments, mix and increased competition in the monogastric business.

Gross margin percentage for the Human Nutrition & Health segment increased by 128 basis points primarily due to the acquired Albion product lines generating a higher margin, along with the exclusion of prior year Albion acquisition accounting related to the fair value of acquired inventory.

Gross margin percentage decreased for the Animal Nutrition & Health segment by 920 basis points primarily due to cost increases of certain key raw materials and the impact from increased competition in the monogastric business and unfavorable product mix and decreased ruminant volumes.

Gross margin percentage for the Specialty Products segment increased by 207 basis points, primarily due to the exclusion of prior year acquisition accounting related to the fair value of acquired inventory relating to plant nutrition, partially offset by an unfavorable mix and certain higher raw material costs.

Industrial Products gross margin increased by 519 basis points due to higher volumes, a favorable customer mix and improved cost structure, partially offset by higher raw material costs. Consolidated operating expenses for the three months ended June 30, 2017 were $21.9 million as compared to $23.1 million for the three months ended June 30, 2016.

The decrease was principally due to a reduction in the amount of noncash operating expense associated with the amortization of intangible assets and a favorable indemnification settlement relating to the acquisition of SensoryEffects, partially offset by increased transaction and integration costs associated with the IFP acquisition.

Excluding transaction and integration costs of $1.9 million, the favorable indemnification settlement of $2.1 million and noncash operating expense associated with the amortization of intangible assets of $5.8 million, operating expenses were $16.3 million or 11.1% of sales.

Looking forward, we will continue to focus on tightly controlling our operating expenses and leveraging our existing SG& A infrastructure. U.S. GAAP earnings from operations were $24.8 million, which increased $1.5 million or 6.4% compared with the prior year comparable quarter.

This increase was primarily due to earnings growth in our Human Nutrition & Health, Specialty Products and Industrial Products segments.

On an adjusted basis, as detailed in our earnings release this morning, earnings from operations of $31.1 million decreased $2.6 million or 7.7% from the prior year comparable quarter, specifically due to lower earnings in our Animal Nutrition & Health segment for the reasons previously noted.

And this was only partially offset by gains in all 3 of our other reporting segments, including from HNH achieving a record second quarter and Specialty Products achieving an all-time record quarter. Interest expense for the 3 months ended June 30, 2017, was $1.9 million, and our net debt on June 30 was $232 million.

The company’s effective tax rates for the 3 months ended June 30, 2017, and 2016 were 26.7% and 33.8%, respectively.

The decrease in the effective tax rate is primarily attributable to the adoption of ASU 2016-09, which required excess tax benefits from stock-based compensation to be recognized as a decrease to the provision for income taxes, a purchase price reduction related to the SensoryEffects acquisition as well as reduced liabilities and tax rates in certain jurisdictions.

As previously noted, consolidated net income closed the quarter at $16.5 million, up $2.4 million from the prior year quarter.

This quarterly net income translated into diluted net earnings per share of $0.51 for the current year, an increase of $0.07 per share over last year’s comparable quarterly result of $0.44, primarily the result of stronger earnings from operations and the aforementioned favorable effective tax rate.

On an adjusted basis, and as detailed in our earnings release, our adjusted net earnings were $20.5 million or $0.64 per diluted share, down 2.7% compared with $21.1 million or $0.56 per diluted share in the prior year quarter.

Our second quarter results generated $86.3 million of adjusted EBITDA or 24.7% of sales in the quarter compared with $39.5 million or 28.5% of sales in the prior year, a decrease of $3.3 million.

As previously noted, our cash flow remains strong as we generated second quarter free cash flow of $15 million and closed out the quarter with 4 – $43.6 million of cash. This reflects scheduled principal and accelerated payments on the long-term debt of $13.3 million, along with $7.9 million of capital expenditure funding in the quarter.

Before I hand the call back over to Bill to go through the segments’ detailed results, I would like to update you on a few of our key growth initiatives. We have clearly identified acquisitions as an important strategic growth opportunity for several of our businesses.

On June 1, we purchased IFP, a privately held manufacturer of agglomerated and microencapsulated food and nutritional ingredients located in Minnesota.

This small but highly synergistic acquisition will expand our Human Nutrition & Health segment’s processing technology and market reach while bringing innovative and value-added systems to our food, beverage and nutrient customers.

While the financial terms of the transaction were not disclosed at the closing of the deal, we are now able to disclose that the company delivered approximately $20 million in annual revenue and $3 million in EBITDA. The purchase price was approximately $20 million.

We are pleased with the financial results through the first month as well as the early progress made on integration and synergy capture as they are on track with our expectations. We have kept you informed about our Albion Clearfield fire recovery efforts. 1 year after the incident, we have made significant progress toward complete recovery.

The extension we are building at our Ogden, Utah facility to essentially replace the manufacturing capabilities from Fairfield is well underway and should be complete by Q4.

In the meantime, good progress has been made on improving interim manufacturing capabilities, including leveraging the acquired IFP assets and know- how to make some of our products at an IFP manufacturing site in Minnesota. This has been a nice early synergy capture.

We continue to progress awareness around choline with the Reference Dietary Intake issued by the Food and Drug Administration and the European Food Safety Authority’s first-ever intake recommendation for this essential nutrient.

We were extremely pleased to see that in June, the American Medical Association announced their support and advocacy for the inclusion of choline in all prenatal vitamins to help maintain normal neural development of the fetus. This creates another very positive tailwind for our VitaCholine market development activities.

We are awaiting the completion of the third Phase III clinical trial for the CureMark drug to be utilized in the treatment of autism. We now expect full enrollment of all 300 participants for this clinical trial within the month of August and completion of the trial by mid-fourth quarter.

The power analysis has confirmed that 300 participants – to be the appropriate sample size. As a result, we continue to believe the likely time frame for our completed NDA submission to be the very end of 2017 or the early part of 2018.

In the meantime, Balchem remains focused on our manufacturing and supply chain preparedness for the ultimate launch of the product while also manufacturing additional trial quantities of the encapsulated enzyme for patients in the ongoing Phase III clinical trial as well as rollover participants from previous trials.

We are encouraged by the progress made over the past few months toward critical milestones within these key growth initiatives. I’m now going to hand the call back over to Bill Backus, who will go through a more detailed analysis of the segment results..

Thanks. Ted. For the quarter, sales of our consolidated Human Nutrition & Health segment were $78 million, an all-time record quarter and an increase of $3.2 million or 4.3% from the comparable prior year quarter.

The sales increase was a result of growth in powder systems, with both the legacy business and IFP contributing, along with volume increases in Cereal Systems. Record second quarter earnings from operations for this segment were $11.3 million versus $9 million in the prior year comparable quarter, an increase of $2.3 million or 25.4%.

Excluding the effect of noncash expense associated with amortization of acquired intangible assets of $5.6 million, record second quarter adjusted earnings from operations for this segment were $17 million compared to $16.7 million in the prior year quarter.

Earnings from operations for the quarter were driven by the aforementioned sales growth partially offset by higher raw material costs. Recovery of higher raw material cost through pricing actions continues to be an important focus of the business team. The Animal Nutrition & Health segment sales of $37 million decreased 2.6% or $1.4 million.

Sales of product lines targeted for ruminant animal feed markets decreased by $1.7 million or 13.9% compared to the prior year comparable quarter due to lower volumes resulting from a significant inventory correction at a large customer and challenging dairy economics, particularly in North America, where milk protein prices just recently reached a decade low point.

This was partially offset by continued sales growth of 5.3% in our flagship product line, ReaShure. Global monogastric species sales, including feed-grade choline products, increased $317,000 or 1.2% from the prior year comparable quarter, primarily due to higher volumes.

ANH quarterly earnings from operations were $3.7 million, a decrease of $3.6 million or 49.5% from the prior year comparative quarter.

The decrease compared to the prior year quarter was a result of the noted lower sales in products targeted for ruminant species animals and significant margin erosion in products targeted for monogastric species due to raw material cost increases combined with increased competition.

It is worth noting that certain key raw material costs were at a low point in the second quarter last year, leading to higher margins and earnings.

Despite these challenges, we remain confident long term in Animal Nutrition & Health as we continue to prove the value of our existing product portfolio while focusing on introducing new and novel products to satisfy attractive end market demands through both organic development and strategic alliances.

The Specialty Products segment achieved all-time record quarterly sales of $20.8 million for the 3 months ended June 30th 2017 as compared with $20.3 million for the 3 months ended June 30th 2016.

The increase of 2.1% was driven by strong domestic and international plant nutrition sales, partially offset by lower repackaged gas sales due to auto timing, lower demand from industrial customers and a smaller harvest in net size within the pasteurization business.

Specialty Products achieved all-time record quarterly earnings from operations of $8.1 million versus $7 million in the prior year comparable quarter, an increase of $1 million or 14.8%.

Excluding the effect of noncash expense associated with amortization of acquired intangible assets of $757,000, all-time record quarterly adjusted earnings from operations for this segment were $8.8 million compared to $8.7 million in the prior year quarter, an increase of $118,000 or 1.4%.

This increase was driven by the higher aforementioned sales growth partially offset by higher raw material costs. We are actively raising prices to help mitigate the increased raw material costs where contract terms permit.

In the Industrial Products segment, sales increased $6 million or 113.9% from the prior year comparable quarter, primarily due to significantly higher sales of choline and choline derivatives used in shale fracking applications, partially offset by the lack of sales to our St.

Gabriel CC Company, LLC partner, which occurred in the second quarter 2016 in advance of the joint venture becoming operational. Compared sequentially to the first quarter 2017, sales increased $3.5 million or 45.4% on a 37.5% increase in volume.

Our earnings from operations for the Industrial Products segment were $1.6 million, a decrease of $1.3 million compared with the prior year comparable quarter and primarily reflects the aforementioned higher sales, favorable customer mix and improved cost structure, partially offset by certain higher raw certain higher raw material costs.

We have now had 4 consecutive quarters of sales growth into the oil and gas industry. While we remain cautious about this industry, we are certainly pleased with the recovery to date of our Industrial Products volumes and profits as rig counts have improved. I’m now going to turn the call back over to Ted for some closing remarks..

Thanks, Bill. We delivered year-over-year revenue and operating earnings growth in 3 of our 4 segments with record overall second quarter revenues of $147.1 million; adjusted net earnings of $20.5 million; and free cash flow of $15 million despite significant challenges, particularly within the Animal Nutrition & Health segment.

Our continued strong cash generation enabled accelerated debt payments of $4.5 million above and beyond the regularly scheduled payment of $8.8 million, reducing our net debt to $232 million on June 30th or approximately 1.6x 12 months trailing adjusted EBITDA, further strengthening our balance sheet.

In addition, we made an accelerated debt payment of $15 million in July, reducing our outstanding revolver balance to $15.5 million from the $85 million that were used to finance the acquisition of IFP in June and partially fund the Albion acquisition in 2016.

In addition to the challenges we are facing within the Animal Nutrition & Health segment, the global macroeconomic environment continues to present headwinds to our company Of particular note are certain rising raw material costs, the ongoing uncertainty in the oil and gas markets and the strong U.S. dollar impacting exports, amongst others.

We are, however, pleased with the progress made on our key strategic growth initiatives and the recent acquisition of IFP, and we will continue to strengthen our company by focusing on these initiatives, exercising disciplined cost management and seeking value-creating acquisition opportunities.

I would now like to hand the call back over to Bill, who will open up the call for questions. .

Thanks, Ted. This now concludes the formal portion of the conference. At this point, we will open the conference call for questions. .

[Operator Instruction] Our first question is coming from Francesco Pellegrino of Sidoti & Company. Please go ahead..

So I just wanted to start off. I didn’t get ReaShure volumes.

What where they up?.

5.3% to the sale..

5.3%.

And volume was?.

I’ll tell you the volume for one second here. Volume was just about in line with that also. .

Okay, so we’re holding pricing flat. In the press release, it’s interesting because you cite challenging dairy economics, but we keep on quarter after quarter after quarter getting nice volume bumps from – for ReaShure.

So how are dairy economics a headwind but then we’re getting these volume benefits that were keeping pricing flat?.

Yes. Francesco, obviously, very good question and a bit of a complicated one. But ReaShure is a product that really helps boost milk production by making the cow healthier, and so we found that making the cow healthier, and so we found that ReaShure demand stays relatively steady even in times of difficult dairy economics.

We are finding – obviously, 5% growth is a little bit less than what we had last quarter and even last year. And we do find that in this kind of environment, while customers – existing customers will clearly stay on ReaShure, it is a little bit more difficult to convince new customers to go on it while there is uncertainty in the market.

But the real impact on us is we don’t, obviously, only sell ReaShure. We also sell other important nutrients. One group of those is around amino acid nutrition and – specifically, methionine. And rumen-protected methionine tends to boost milk protein production in the cow.

And so when milk protein prices are particularly low, there are some trade-offs that the nutrionists make, and that’s really where the biggest impact has been, in the amino acid supplementation area, not so much in ReaShure. And the methionine products are our highest-price products, so it kind of has a bigger impact when volume’s down there.

But this quarter, that inventory destocking was a very significant part of our shortfall. Year-to-date, that one customer is down about $5 million year-over-year, split equally amongst the 2 quarters. So that destocking, right now, relative to the rumen business really is by far the major impact on our business.

And we see that really improving here in Q3 and Q4 and getting back to very normal levels early next year. But the big hit from that is really behind us. But the dairy economics that we tend to talk about is – right now, it’s really all about milk protein. And milk protein, just the other day, hit $1.22, which is an extraordinarily low number.

I think I look back to the year 2000, I think it’s the lowest number since 2000. So that’s the part of the dairy economic discussion that really hurts us. Folks out there who are promoting products for – to increase fat, for example, fat prices are through the roof. And so you’ll probably see some folks announce positive dairy economics.

Well, the daily fat prices are very high right now. So if you have products that are focused on that part of the market, you may be doing quite well. But ours are more on the overall protein as well as milk production. Hopefully, that answers your question..

Yes.

Did you say the inventory correction was an impact of $5 million for the quarter?.

No, $5 million year-to-date. About $2.5 million in the quarter..

Okay, that was very helpful. I just wanted to move over to the IFP acquisition. So you said it does revenue of about $40 million annualized, acquired it for – did $3 million in EBITDA, comes down to about a little bit less than a 7x EBITDA valuation that you paid for it. SensoryEffects, you paid 11x Albion, I think you paid 10.5x.

But SensoryEffects had in excess of 40%, I think, EBITDA margins. Albion also has a very strong EBITDA margins. When I think about IFP rolling into the Human Nutrition & Health segment, I look at the EBITDA margins of about 15% and I’m thinking low..

Sorry, go ahead..

So they suggesting very low. Maybe they – if it’s a distressed business. I’m not sure if there’s upside that you see a lot of synergies sort of bringing the EBITDA margin up 500, 1,000 basis points. Just a little bit of color maybe where you see this business going in regards to expanding profitability..

Sure, yes. We really – I think you spell that out well. Just kind of one correction. I think if you go back and look at SensoryEffects when we acquired them, probably had EBITDA margins in the low 20s, so not up in the 40s. But still certainly higher than IFP, and your point is quite valid. We felt like we paid a very reasonable multiple.

And if you look at that multiple post-synergies, we feel like it was a very attractive acquisition for us. We believe that we can, indeed, increase the EBITDA margin by 1,000 basis points plus. We feel like based on synergies and integrating the 2 companies that we should be able to essentially double the EBITDA of the business.

So that’s going to take a couple years, but we feel like we can get that business to be in line with Balchem as a whole, if not adding a little bit to our average margin..

Thank you for the correction on the EBITDA margin. I think I was in net for Specialty Products line..

Yes, yes. It could be that..

So then looking at IFP post-synergies, this is coming out to about 4x post-synergy EBITDA, which just sort of seems like a steal..

I think it’s – again, I’m not sure I would say a steal. We obviously have to execute on those synergies, and there’s a lot of work ahead of us. But we think we really got a very attractive deal. We were a very logical buyer for the business.

We have probably more overlap with IFP than most anybody else with their agglomeration capability or encapsulation capability. So I think we were uniquely positioned to take on IFP and combine it. And yes, we think we did well with the negotiation..

Are you seeing a lot of other potential acquisitions in line with these types of valuations right now? I want to know what else is coming across your plate..

I think this one is – was a real unique opportunity for us that we took advantage of. And getting any acquisition across the goal line takes a lot of efforts, so we’re pleased that it’s part of our company. And again, we talk about numbers, but we also acquired some really, really good people, some good know-how and assets. So we’re excited about that.

We work hard, obviously, on acquisitions. We are pretty consistent in saying our primary focus is on driving organic growth, and it is. But we do spend a lot of time on acquisitions, and we do see other acquisition opportunities out there that are not in the stratosphere from a multiple perspective.

And we’re spending quite a bit of time trying to target those opportunities and focusing on how do we advance our strategic growth initiatives, how do we get a foothold in Europe, for example, from a dairy industry in a encapsulation perspective, maybe similarly in Asia and some of the emerging economies.

Those kinds of acquisitions are, obviously, very strategic for us and get lot of our attention..

Okay. And last question before I jump into queue. So the Specialty Products segment, which just continues to be like a bright spot for the business, I think you said it, the plant-based – a product mix shift towards plant-based product sales, which is probably attributable to Albion.

I was wondering if you could just maybe discuss a little bit about like the product mix shift within the legacy portion of Specialty Products..

One is the order timing of one large customer. Q2 happened to be low. We think Q2 will rectify that. We also – we do have some industrial customers in that business.

We don’t really talk a whole lot about that, but we had one industrial customer – a sizable industrial customer was purchased and consolidated with a larger customer and is starting to move to more bulk purchases away from our value proposition of providing gas in smaller packages.

And then thirdly, an important part of that business is nut and spice fumigation. And in certain areas, nut crops were a little bit disappointing. And actually, the size of the nut was smaller than normal, and then that just reduces the amount of gas that is needed. I think all of those things are somewhat temporary.

The nut crop is said to be – going to be a record this year. And so we see, as the year goes on, those are not significant concerns from our perspective..

Perfect. Thank you again..

Thanks Francesco..

Thank you. Our next question is coming from Brett Hundley of The Vertical Group. Please go ahead..

Hi, good morning guys. Thanks for the color on the IFP synergies. I thought that was really helpful, and I wanted to follow on by just asking you to the extent that you can share. Can you kind of go through that synergy potential? Ted, you talked about needing to execute on that.

Can you give us a sense of whether those synergies are pretty much all hard cost savings opportunities? Do some of them depend on revenues materializing in any way? Can you just kind of walk us through the bucket so that we can understand better your potential for realizing them?.

So I would characterize them as primarily hard cost savings, Brett, and that would be in our control. If I have wanted to hedge, I might say $2.5 million hard synergies that are completely in our control as opposed to the full $3 million. But we found with Albion significant raw material cost savings.

Again, Balchem is not a huge company, but we’re a lot bigger than Albion was and certainly, IFP. And we’ve been very pleasantly surprised at purchasing cost synergies, whether it’s MRO spending or raw materials, what have you. And we are seeing I think significant savings at IFP and realizing some of those even today.

So those are some good examples of savings. But clearly, integrating the two organizations and our asset structure will provide significant opportunities for us that we have visibility into and are making progress even as we speak toward taking those costs out..

And is there a lump sum that comes in at any one point in time? Or should we expect them more evenly across that to your opportunity set? And I guess related to that, I always like to ask, should we, as we put together models, think about those savings dropping to the bottom line? Or should we think about some type of net number as maybe you look to reinvest here or there?.

I think that if you look at the savings, I would assume a relatively even realization of those across the next three quarters. I think that would probably be a good – that’s essentially consistent with our goal. I don’t think it’s – when I said two years, it’s really this is kind of year one.

And I think if you do it over the next three quarters, you’ll get into year two. But it’s not going to take us that long. Obviously, we need to harmonize systems and so on and so forth that has a little bit of an impact on the time line. But I think if you do that, that’s probably reasonable. And I would expect the majority to fall to the bottom line..

Okay, I appreciate that. Kind of a higher-level, big picture-type question. Ted, just – I’m trying to think about HNH going forward. And there’s always so many pieces within that business that can be moving on you, and it’s nice to see you guys call out powder systems as maybe doing a little bit better, the same with Cereal Systems.

Do you get the sense – or do you get the feeling that, that business is gaining any type of momentum for you guys? Do you think that we should think about business performance in HNH as somewhat lumpier across quarters or even half years? And I guess one of the main reasons I’m asking this question is in the context of what’s happening more downstream for you guys and some of the challenges that the retail market is experiencing and some of the challenges that then fall back to food and beverage and related companies.

And so I just wanted to get a comment from your vantage point on your expectations for your HNH business maybe over the nearer term and into 2018..

Yes. I think at that overall, I would describe the current situation as having positive momentum. But I do think that this market you alluded to is – can be a little bit lumpy. And we have a – just thinking as you say that, we have a fair amount of business that goes into private label.

And kind of share of private label shelf space versus branded shelf space is something that changes and has some impact. We’ve talked in the past about warm weather and cold weather. That can create some lumpiness. We also have a couple of very large customers. We’ve talked about Keurig in the past that can create some lumpiness sometimes.

But I think that today, we have positive momentum. I do think that we are starting to get some traction around the choline RDI, and our choline sales are up about 12.5%, 13% year-to-date. There’s a good example of lumpiness. Q1 was really good. Q2 wasn’t the best. July looks pretty good. And year-to-date, we’re up about 12.5%, 13%.

I think our minerals business, with the fire behind us, we’re going to get some improvement going forward there. And I do think that we’ve started to stabilize the powder systems business and are starting to see some positive momentum. The – as I’ve talked about in the past, one huge focus in that business today is illuminating PHOs.

And we are – I think we’re done making products with PHOs as we speak. And so we’re really making that transition, and we feel very good about the PHO-free solutions that we brought to the market and feel like we’re winning more than we’re losing there. And I think that creates some positive momentum. But I do like your word lumpy.

We do – in our flavors business, we get into these limited time offer products. We’ll win the flavor system in an ice cream at certain customer, and it’s a 6-month promotion. And we really enjoy that while it’s happening, and then it’s gone.

And so we have to have this constant pipeline of new opportunities to go after, and that creates a little bit of lumpiness. But the overall momentum, I would say, is positive..

That truly helpful. Bill, just two financial questions for you, and then yield the floor. Can you just give us, to the extent that you can, some tax rate guidance on the back half of the year? I think Q4 is usually a lower rate for you guys anyway, but looking for a little bit of help because we got surprised a little bit in Q2 there..

Yes. I think you should probably use 33% for both quarters. I know we have had a couple of years where the fourth quarter has had some discrete items that have helped it, but I’m not counting on that this year.

And Qs 2 and 1 were helped – excluding the impact of the options, of course, the equity comp, I should say, there were other discrete items that helped those quarters, which, obviously, by definition, is discrete there in the quarter. And I’m not counting on those going forward either at this point because they were in those quarters.

But I do believe if you use 33% going forward, that’s a good estimate..

Okay. And then just lastly, your guys net debt, I guess, you’re a little bit above $200 million now. I’ve got you around 1.5x levered post that payment that you made. You’ve been making some accelerated payments on debt that is frankly pretty cheap.

And so I guess I’m curious how you guys think about your overall strategy within capital allocation and if there’s really a floor as it relates to debt pay-down, where then you start to take excess cash and capital and start funneling it into other areas.

And I suppose there’s more deals that you’d like to do, but that doesn’t always work out from a timing perspective. And so I just wanted to get inside your heads a little bit on how you’re thinking about that as debt comes down..

Yes. I think, at this point, obviously, we’re still paying down the revolver. So in the short term, we can reborrow that. So that’s why we’re paying it down to save the interest while we can. On a long-term basis, once the revolver goes away, we’ve had discussions about what we want to do. Clearly, our preference is not to pay the debt down.

It’s to reinvest in the company, reinvest and hopefully grow organically, whether it’s the right CapEx, expansions, R&D, whatever it may be, that’s going to give us the best kind of growth. And secondary to that, of course, is continuing to look at acquisitions, and Ted talked about it a little bit. And we certainly have acquisitions.

We’re currently looking at that. They’re in the pipeline. So we’re going to have to weigh that a little bit in terms of do we pay down the term loan and we can’t get that back. We really are not overly concerned about access to the debt capital markets.

If we want to borrow more money in the pro rata debt market that’s still going to be a very good rate, we can go do that. So our preference here, obviously, is to take this revolver down and think longer term of what’s available for us in terms of investments.

If not, we’re likely to pay that term loan down also knowing that we can always go back and quickly borrow more money pretty easily..

Great thanks guys..

[Operator Instructions] Our next question is coming from Tim Ramey of Pivotal Research. Please go ahead..

Thanks so much. Just one more question on the IFP deal. You certainly had a leading-edge agglomeration and microencapsulation technology already. Is this technology you’re purchasing different in a meaningful way? You mentioned you acquired know-how.

Is there true intellectual property that is part of this? Or is this capacity? Or how should we think about what that brings to Balchem?.

Yes, there’s really both assets, and let’s just maybe talk about that a little bit. We invested in a continuous agglomerator, which really is what it sounds like. It’s a large agglomeration unit that really is better for big batches or big runs, sizable product lines. IFP has quite a few batch agglomerators, and they are what it sounds like, too.

They’re better suited for making smaller products, more maybe niche-type products.

And so we really are quite pleased with the idea of having both of those assets and solutions to offer the customer because when we – I think we knew exactly what we were doing when we invested in a continuous agglomerator, but it has become more and more evident to us over time that we are limited in really having to take on big customers, big product lines within those big customers.

And we’re quite excited to have increased flexibility with the smaller batch agglomerators. And then on the know-how side of things, we invested in a big piece of equipment that’s relatively new, and we obviously have some very smart, good, capable particle manipulation, sprayed dry type experts.

But we aren’t really expert in agglomeration, and IFP really has some tremendous know-how there. They’ve been doing it for a long time, and they have some real experts within their R&D and manufacturing organization that we’re really excited to have as part of the team. So it’s really a combination of both.

Maybe a little less so on the encapsulation side of things. They do encapsulation a little bit differently than us, and we’re looking forward to kind of learning about those differences. But we really are encapsulation experts.

And while I think we can learn something from IFP, it’s really more – when I talk about know-how, it’s more on the agglomeration side of things..

Perfect. And just a question on the monogastric choline business. You mentioned more competition.

Is that competition from offshore choline producers? Is it betaine? How should we think about that?.

It’s really twofold, and I’ll kind of speak globally. We have a pretty sizable business in Europe as well as the business here in the U.S. And it’s really a combination of the traditional competition that we’ve seen from Eastman, formerly Taminco, as well as BSF, but also imported products from China. Not so much betaine.

We’ve talked about betaine in the past, and we are not seeing a measurable increase in betaine or significant competition there. It’s really from the historical players. Of course, Eastman is now in the U.S. market to a greater extent than they had been in the past, and that’s playing a role.

But it’s really kind of combination of the Chinese imported product as well as those traditional players..

Okay, terrific. And I suppose it’s impossible to say, but truly stunning improvement in the gas fracking business.

How should we think about that in terms of stickiness?.

Well, I think that in Bill’s prepared comments, he mentioned we’ve been, if you recall, pretty reluctant to be optimistic about this market. But we have now had 4 quarters in a row of increasing volume. I am also quite pleased that our volume seems to have come back similarly to rig count.

And our business doesn’t necessarily – if you really know our product line, it really more is aligned with fracking activity as opposed to just rig counts. But on the way down, we pretty much follow rig counts. So that’s been positive. Rig counts are, today, about 50% – a little less than 50% of what they were.

Our caution would say, we don’t see any way that it’s going to go back to where it was. But given that we’ve now had these multiple quarters of increase, we’ve had multiple quarters of oil prices bouncing anywhere from kind of the mid-40s to $50. I see oil is down a little bit today, but it was close to $50 again.

I think we’re feeling more positive that it is relatively sticky, and there could be some possible upside as we move forward for the rest of the year, certainly, comparing the rest of this year to the tail end of last year, which was sort of at our low point..

Great. And just one modeling question, Bill. The call-out on the amortization of intangibles were $6.572 million, but the attribution of that to the segments was light by about $0.18 million. I know it’s small, but I’m trying to get the model right.

Where would that $0.18 million have shown up?.

It’s an interest amortization of deferred financing cost that was up..

Okay, that’s helpful..

Thank you. Our next question is coming from Tony Polak of Aegis Capital..

Good morning..

Good morning, Tony..

In terms of capital expenditures, I see they were up a lot.

Is that for the rebuilding of the plants? And what can we expect in the next couple quarters?.

Yes. I think we’re still kind of on track for the full year to be somewhere around $25 million, maybe $27 million. When you look at it, for the quarter, for sure, up. But for the 6 months, we’re actually down. It’s just timing of the spend, but that’s kind of where we expect to be for the full year..

And can you give us an idea of where that is going to be spent?.

There’s various projects. I wouldn’t say there’s anything significantly large right now. We have quite a bit of ROI projects. There’s obviously always maintenance capital. So there’s really – there are some smaller expansion projects, but nothing significant like the agglomeration unit that we put in last year..

Our significant expense right now, Tony, is around the Clearfield rebuild project down in Utah. That won’t be double digits, but it’ll be high single digits, millions of dollars to rebuild that site. But we’re pleased because we’ve consolidated that site really into another one of our sites, and there will be some efficiencies created by that.

So that’s quite positive..

And there will be, obviously, insurance proceeds related to that also..

Okay, thanks..

Thank you. At this time, I’d like to turn the floor back over to Mr. Backus for any additional or closing comments..

Well, I just want to thank everybody for joining us on this quarterly conference call. We appreciate everyone’s participation. And certainly, as always, we’re available for follow-up questions if need be..

We look forward to talking to everybody in November. Thanks..

Ladies and gentlemen, thank you for your participation. This concludes today’s conference. You may disconnect your lines at this time, and have a wonderful day..